The impacts of problems in the housing market are hitting close to home, but the actual number of foreclosures often winds up underreported. New federal and state laws are focused on alleviating these problems locally and nationally.
The foreclosure numbers reported by Supt. Lloyd LaFountain III, of the Maine Dept. of Financial Institutions represent only a small amount of the actual foreclosures, including only those held by banks, according to Carla Dickstein, Research and Development Senior Program Officer at Coastal Enterprises Inc.
Mortgages held by trusts, credit unions, non-bank lenders, or secondary market intermediaries are not included in those numbers, she said.
A more accurate method is to look at loans in foreclosure and starting foreclosure, loans in default, as well as seriously delinquent mortgages (those more than 90 days past due), Dickstein said. For third quarter 2008, that could be as many as 7700 loans in Maine.
“Not all these mortgages end up in foreclosure,” she said. “They could wind up as short sales where owners take less money than the home is worth. Or sometimes the banks accept the deed in lieu of foreclosure.”
Dickstein said the homeowner loses their house in both situations, but neither is counted as a foreclosure.
According to the Maine Association of Realtors, housing prices in Lincoln County dropped more than 20 percent between November 2007 and January 2009.
“If a person bought their home at a high price at the height of the housing bubble, falling prices now may automatically put their mortgage underwater,” Dickstein said. “Many people don’t have enough equity in their homes to refinance. If they’re having trouble making payments and want to sell, the payments are already more than the mortgage is worth.”
CEI is definitely seeing an increase in people seeking help, Dickstein said. These problems are sending people in droves for housing counseling, legal aid, and bankruptcy advice. She explained sometimes people go into bankruptcy to delay foreclosure proceedings.
Both state and federal legislation is in the works to help alleviate some of these problems, she said. President Barack Obama is currently trying to push through a $275 billion dollar housing package.
Dickstein thinks this is “a step in the right direction,” because she said it offers financial incentives for loan servicers to refinance and restructure loans. Often the bank that owns a homeowner’s mortgage, doesn’t service the loan itself, collect payments, or recover delinquent funds.
“Trying to keep someone in their house takes more time and money,” Dickstein said. “The new legislation offers a system of fees and incentives for servicers to make money on those loans.”
As government TARP funds are distributed to banks, it is with the caveat that they use those funds to restructure mortgages, she said.
The current modifications that servicers and lenders make now cannot help people having financial difficulties, because they don’t reduce the amount of money owed or the interest rate.
The new federal legislation proposes modifications, which are not sustainable over the long run, but will help alleviate problems right now, according to Dickstein.
With the new federal law, the lender is required to reduce the interest rate or principle to get the borrower’s payment down to 38 percent of their income. Then the government would step in to bring the payment down to 31 percent of the borrower’s income, she said.
“This requires a substantial amount of government subsidy,” Dickstein said. “It makes working out an agreement with the borrower less expensive for the lender than proceeding with foreclosure.”
Also included in the works are changes to the bankruptcy laws. New bankruptcy laws could give judges authority to modify first home mortgages, done under supervision of the bankruptcy courts, she said. Currently first home mortgages cannot be judicially modified, only second or vacation homes, Dickstein said.
In the state legislature, Rep. Sharon Treat (D-Hallowell) developed a comprehensive foreclosure bill, LD 377, to address some of these problems, said Dickstein. It calls for a mandatory mediation process before the case goes through the courts.
“The court system is looking to reduce costs and shorten processes, because they are inundated with foreclosures,” she said. “This would require the lender’s representative to have decision making authority. Hopefully it would provide better outcomes than what we have now.”
She said this mandatory mediation system is being used in Philadelphia with good short-term results thus far.
It will take time to see the full effects this legislation will have on homeowners, according to Dickstein. She thinks this new federal law has “more teeth in it than anything before.” Dickstein said it offers more incentives than before, but it still won’t help everybody.
“Many people are going into foreclosure with prime loans because they lost their jobs,” Dickstein said. “With no income they will not meet the criteria for the law. I’m optimistic the new laws will help more people and be more effective.”